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Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
, 1976
"... This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of ..."
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Cited by 3043 (12 self)
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This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
A closedform solution for options with stochastic volatility with applications to bond and currency options
 Review of Financial Studies
, 1993
"... I use a new technique to derive a closedform solution for the price of a European call option on an asset with stochastic volatility. The model allows arbitrary correlation between volatility and spotasset returns. I introduce stochastic interest rates and show how to apply the model to bond option ..."
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Cited by 1512 (6 self)
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I use a new technique to derive a closedform solution for the price of a European call option on an asset with stochastic volatility. The model allows arbitrary correlation between volatility and spotasset returns. I introduce stochastic interest rates and show how to apply the model to bond options and foreign currency options. Simulations show that correlation between volatility and the spot asset’s price is important for explaining return skewness and strikeprice biases in the BlackScholes (1973) model. The solution technique is based on characteristic functions and can be applied to other problems. Many plaudits have been aptly used to describe Black and Scholes ’ (1973) contribution to option pricing theory. Despite subsequent development of option theory, the original BlackScholes formula for a European call option remains the most successful and widely used application. This formula is particularly useful because it relates the distribution of spot returns I thank Hans Knoch for computational assistance. I am grateful for the suggestions of Hyeng Keun (the referee) and for comments by participants
Option Pricing: A Simplified Approach
 Journal of Financial Economics
, 1979
"... This paper presents a simple discretetime model for valumg optlons. The fundamental econonuc principles of option pricing by arbitrage methods are particularly clear In this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Blac ..."
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Cited by 1016 (10 self)
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This paper presents a simple discretetime model for valumg optlons. The fundamental econonuc principles of option pricing by arbitrage methods are particularly clear In this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black&holes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very constructlon, it gives rise to a simple and efficient numerical procedure for valumg optlons for which premature exercise may be optimal. 1.
The pricing of options on assets with stochastic volatilities
 JOURNAL OF FINANCE
, 1987
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Coherent measures of risk
, 1999
"... In this paper we study both market risks and nonmarket risks, without complete markets assumption, and discuss methods of measurement of these risks. We present and justify a set of four desirable properties for measures of risk, and call the measures satisfying these properties “coherent.” We exami ..."
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Cited by 921 (4 self)
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In this paper we study both market risks and nonmarket risks, without complete markets assumption, and discuss methods of measurement of these risks. We present and justify a set of four desirable properties for measures of risk, and call the measures satisfying these properties “coherent.” We examine the measures of risk provided and the related actions required by SPAN, by the SEC/NASD rules, and by quantilebased methods. We demonstrate the universality of scenariobased methods for providing coherent measures. We offer suggestions concerning the SEC method. We also suggest a method to repair the failure of subadditivity of quantilebased methods.
The Valuation of Options for Alternative Stochastic Processes
 Journal of Financial Economics
, 1976
"... This paper examines the structure of option valuation problems and develops a new technique for their solution. It also introduces several jump and diffusion processes which have nol been used in previous models. The technique is applied lo these processes to find explicit option valuation formulas, ..."
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Cited by 679 (5 self)
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This paper examines the structure of option valuation problems and develops a new technique for their solution. It also introduces several jump and diffusion processes which have nol been used in previous models. The technique is applied lo these processes to find explicit option valuation formulas, and solutions to some previously unsolved problems involving the pricing ofsecurities with payouts and potential bankruptcy. 1.
Managerial Discretion and Optimal Financing Policies
 J. Finan. Econ
, 1990
"... I analyze financing policies in a firm owned by atomistic shareholders who observe neither cash flows nor management’s investment decisions. Management derives perquisites from investment and invests as much as possible. Since it always claims that cash flow is too low to fund all positive net prese ..."
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Cited by 453 (18 self)
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I analyze financing policies in a firm owned by atomistic shareholders who observe neither cash flows nor management’s investment decisions. Management derives perquisites from investment and invests as much as possible. Since it always claims that cash flow is too low to fund all positive net present value projects. its claim is not credible when cash flow is truly low. Consequently, management is forced to invest too little when cash flow is low and chooses to invest too much when it is high. Financing policies, by influencing the resources under management’s control, can reduce the costs of over and underinvestment. 1.
Pricing with a Smile
 Risk Magazine
, 1994
"... prices as a function of volatility. If an option price is given by the market we can invert this relationship to get the implied volatility. If the model were perfect, this implied value would be the same for all option market prices, but reality shows this is not the case. Implied Black–Scholes vol ..."
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Cited by 445 (1 self)
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prices as a function of volatility. If an option price is given by the market we can invert this relationship to get the implied volatility. If the model were perfect, this implied value would be the same for all option market prices, but reality shows this is not the case. Implied Black–Scholes volatilities strongly depend on the maturity and the strike of the European option under scrutiny. If the implied volatilities of atthemoney (ATM) options on the Nikkei 225 index are 20 % for a maturity of six months and 18 % for a maturity of one year, we are in the uncomfortable position of assuming that the Nikkei oscillates with a constant volatility of 20 % for six months but also oscillates with a constant volatility of 18 % for one year. It is easy to solve this paradox by allowing volatility to be timedependent, as Merton did (see Merton, 1973). The Nikkei would first exhibit an instantaneous volatility of 20 % and subsequently a lower one, computed by a forward relationship to accommodate the oneyear volatility. We now have a single process, compatible with the two option prices. From the term structure of implied volatilities we can infer a timedependent instantaneous volatility, because the former is the quadratic mean of the latter. The spot process S is then governed by the following stochastic differential equation: dS �rt () dt��() t dW
An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees: An Application of Modern Option Pricing Theory
 Journal of Banking and Finance
, 1977
"... It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be g ..."
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Cited by 444 (6 self)
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It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be guarantees of bank deposits by the Federal Deposit Insurance Corporation. As with other forms of insurance, the issuing of a guarantee imposes a liability or cost on the guarantor. In this paper, a formula is derived to evaluate this cost. The method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula. 1.